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Feb 21, 2011 - Jack Kemp, Wall Street Journal editorial writer Jude Wanniski, economist Arthur. Laffer, and other proponents of supply-side eco- nomics.

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tax notes Reagan’s Forgotten Tax Record By Bruce Bartlett Bruce Bartlett is a former Treasury deputy assistant secretary for economic policy. His latest book is The New American Economy: The Failure of Reaganomics and a New Way Forward (2009). In this article, Bartlett reviews Ronald Reagan’s long record of increasing taxes, both as governor of California and as president.

February 6 was the 100th anniversary of the birth of Ronald Reagan and brought forth predictable tributes from conservatives eager to wrap themselves in the mantle of their hero. Many declared his 1981 tax cut one of the seminal economic accomplishments in history. I saw no tributes to Reagan’s legacy as a tax increaser, however — an important part of his legacy that conservatives would like to forget. Reagan’s record on raising taxes began almost the moment he entered politics. Elected governor of California in 1966, he inherited a large budget deficit from his predecessor, Pat Brown. Although a conservative dedicated to shrinking government, Reagan nevertheless found the magnitude of spending cuts that would have been necessary in 1967 beyond reach. That led him to endorse a $1-billion-per-year tax increase, equivalent to a $17 billion tax increase today — an enormous sum equal to one-third of state revenues at that time. Journalist Lou Cannon recounted the circumstances: No amount of budget reductions, even if they had been politically palatable, could have balanced California’s budget in 1967. The cornerstone of Governor Reagan’s economic program was not the ballyhooed budget reductions but a sweeping tax package four times larger than the previous record California tax increase obtained by Governor Brown in 1959. Reagan’s proposal had the distinction of being the largest tax hike ever proposed by any governor in the history of the United States.1

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Cannon, Governor Reagan 194 (2003).

The top income tax rate was raised from 7 to 10 percent, the sales tax rate went from 3 to 5 percent, the cigarette tax was increased from 3 cents to 10 cents per pack, the gas tax was raised from $1.50 to $2 per gallon, the bank and corporate tax rate went from 5.5 to 7 percent, and the inheritance tax rose from a range of 2 to 10 percent to a range of 3 to 15 percent.2 According to Cannon, this was essentially the Democrats’ wish list of tax initiatives, with the sole exception that it did not institute tax withholding, which Reagan adamantly opposed. In Cannon’s words, ‘‘An economist who analyzed the tax bill without knowing its political background might conclude that it had been crafted by a New Deal Democrat.’’3 In 1970 Reagan proposed yet another big tax increase of $1.1 billion to finance property tax relief. Incomes exceeding $32,000 would have been subject to a new 11 percent tax rate, and three years later a new 13 percent bracket would have applied to those with incomes exceeding $36,000. The bill also would have instituted tax withholding, which ironically led to its defeat in the California Senate by a single vote. However, many of those provisions were enacted the following year.4 The 1971 legislation raised taxes by $508 million (about $6 billion today), including an increase in the top income tax rate to 11 percent, a rise in the bank and corporate tax rate from 7 to 7.6 percent, and the introduction of an alternative minimum tax and tax withholding.5 State taxes were raised another $1.1 billion in 1972 (about $12.5 billion today). The legislation included another increase in the sales tax rate from 5 to 6 percent and a further rise in the bank and corporate tax rate from 7.6 to 9 percent.6 Reagan had little to say about these tax increases in his memoirs except to claim that he gave $5 billion back to taxpayers.7 In many cases, however, the tax relief consisted of tax rebates and one-shot

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David R. Doerr, California’s Tax Machine 89 (2008). Cannon, supra note 1, at 199. 4 Garin Burbank, ‘‘Speaker Moretti, Governor Reagan, and the Search for Tax Reform in California, 1970-1972,’’ Pacific Historical Rev. (May 1992), at 199-200. 5 Doerr, supra note 2, at 136-137. 6 Carl Greenberg, ‘‘$1.1 Billion Bill to Shift Taxes Signed Into Law by Reagan,’’ Los Angeles Times, Dec. 19, 1972, at 3. 7 Ronald Reagan, An American Life 191 (1990). 3

TAX NOTES, February 21, 2011

Electronic copy available at: http://ssrn.com/abstract=1766683

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(C) Tax Analysts 2011. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.

POLICY PERSPECTIVES

COMMENTARY / POLICY PERSPECTIVES

After leaving the governorship, Reagan ran for the Republican presidential nomination in 1976. No mention was made of the many tax increases he enacted in California. Instead, his principal focus was on cutting spending, which ultimately sank his chances for the nomination when he proposed dumping $90 billion (almost $700 billion today) in federal spending on the states to balance the budget.10 Over the next few years, Reagan came under the influence of Rep. Jack Kemp, Wall Street Journal editorial writer Jude Wanniski, economist Arthur Laffer, and other proponents of supply-side economics. While skeptical at first, in 1979 Reagan endorsed the Kemp-Roth tax bill, which would have cut statutory income tax rates by about 30 percent across the board. After winning the White House in 1980, Reagan sent the Kemp-Roth proposal to Congress; it became law in August 1981. Almost immediately on enactment of the 1981 tax cut, Reagan came under enormous pressure to do something about the federal budget deficit. While his preferred approach was to cut spending as much as necessary, it was not politically possible. His aides began pressuring him to support a tax increase. Conservative activists were appalled that Reagan would even consider such a thing, but he eventually endorsed the 1982 Tax Equity and Fiscal Responsibility Act. According to a Treasury Department analysis, it raised taxes by close to 1 percent of GDP — equivalent to $150 billion per year today — and was probably the largest peacetime tax increase in American history.11 That was just the first of 11 tax increases that President Reagan endorsed and signed into law. And this doesn’t count the fact that Reagan intentionally delayed the start of tax indexing — part of the 1981 tax bill — until 1985 so as to capture a lot of anticipated bracket creep for the Treasury. In fact, it was inflation’s failure to come in as fast as White House economists expected that created much of

Legislation 1982 Tax Equity and Fiscal Responsibility Act Highway Revenue Act of 1982 Social Security Amendments of 1983 Railroad Retirement Revenue Act of 1983 Deficit Reduction Act of 1984 Consolidated Omnibus Budget Reconciliation Act of 1985 Omnibus Budget Reconciliation Act of 1986 Superfund Amendments and Reauthorization Act of 1986 Continuing resolution for 1987 Omnibus Budget Reconciliation Act of 1987 Continuing resolution for 1988 Total cumulative tax increase

Billions of Dollars $57.3 $4.9 $24.6 $1.2 $25.4 $2.9 $2.4 $0.6 $2.8 $8.6 $2.0 $132.7

the deficit problem.12 It’s also worth noting that the Tax Reform Act of 1986, which was revenue neutral in the long run, was a fairly substantial revenue raiser its first year, increasing taxes by $18.6 billion, or 0.41 percent of GDP.13 According to a table in Reagan’s last budget (fiscal 1990), the cumulative legislated tax increase during his administration came to $132.7 billion as of 1988 ($367 billion today), compared with a gross tax cut of $275.1 billion. Thus, Reagan took back about half the 1981 tax cut with subsequent tax increases. As with his California tax increases, Reagan had little to say about them afterwards. In his diary, he wrote only that the TEFRA bill was ‘‘the price we ha[d] to pay to get the budget cuts.″14 He later tried to repudiate his consistent support for tax increases after 1981.15 But it’s clear that getting control of the deficit in the 1980s required both spending cuts and higher revenues. In the end, Reagan’s tax legacy fits neither rightwing nor left-wing pigeonholes. Although he cut taxes when he could, he raised them when he had to. That’s something today’s self-styled Reaganites should remember.

12 I estimate that lower than expected inflation and the loss of bracket creep were responsible for about half the budget deficit in 1981 and 1982. Bartlett, The New American Economy 121 (2009). 13 Tempalski, supra note 11, at 16-17. 14 Douglas Brinkley, ed., The Reagan Diaries 96 (2007). 15 Reagan, ‘‘There They Go Again,’’ The New York Times, Feb. 18, 1993; ‘‘Hurry Up and Wait,’’ The Wall Street Journal, July 8, 1993.

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Doerr, supra note 2, at 124, 142, 144-145. Data downloaded at www.dof.ca.gov/budgeting/budget_ faqs/information/documents/Chart-A1.pdf. 10 Cannon, supra note 1, at 406-411. 11 Jerry Tempalski, ‘‘Revenue Effects of Major Tax Bills,’’ Office of Tax Analysis Working Paper 81 (Sept. 2006), at 15-17. 9

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TAX NOTES, February 21, 2011

Electronic copy available at: http://ssrn.com/abstract=1766683

(C) Tax Analysts 2011. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.

tax cuts.8 In the end, it is clear that Reagan presided over an astonishing expansion of taxes in California. According to the California Department of Finance, state revenues tripled from $2.9 billion in the 1966-1967 fiscal year to $8.6 billion in the 1974-1975 fiscal year, Reagan’s last.9